Transforming Post-Communist Political Economies (1998) / Chapter Skim
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2 Rethinking the Theory of Economic Policy: Some Implications of the New Institutionalism
2 Rethinking the Theory of Economic Policy: Some Implications of the New Institutionalism
Pages 61-79
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From page 61... ...
In economics, a new emphasis on information scarcity suggested that transaction costs seriously limit effective social engineering and complicate economic organization (Furubotn and Richter, 1993; Kreps, 1990; Milgrom and Roberts, 1992; North, 1990; Stiglitz, 1994; Williamson, 1985~. Growing pessimism about traditional approaches produced neither systematic reevaluation of development strategies nor a new consensus on the appropriate scope for public policy.
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From page 62... ...
This chapter introduces institutional analysis to the old theory of economic policy to its policy models and its instruments, targets, and policy measures in the hope that the new institutionalism will reveal its policy implications when viewed against the background of the traditional policy world. More particularly, the chapter explores the ways information scarcity affects policies aimed at social transformation.
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From page 63... ...
The policymakers are distinct from the social system and control some of the exogenous variables, whereas other exogenous variables constrain their actions. The policy model describes the choices open to policymakers: their opportunities to reach targets (desired values of endogenous variables)
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From page 64... ...
However, it is useful conceptually to distinguish fundamental system transformations from behavioral responses to changes in relative prices within a given system. Structural policy obviously invites new quantitative policy (and a new quantitative policy model)
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From page 65... ...
The Need to Extend the Policy Model The old theory, which was concerned primarily with quantitative microand macroeconomic relationships, assumed that the target preference functions of policymakers coincide with the normative standards of economic theory. Traditional policy analysis usually ignored the incentives and behavior of political actors or the influence of political processes on targets for growth, stability, pollution abatement, regulation, or the division of investment funds among sectors.
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From page 66... ...
The need to expand the policy model to incorporate this interaction is particularly obvious when policy experts seek strategies for instituting economic measures that (at least in the short run) have tenuous support among the general public, those in power, and those seeking power.
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From page 67... ...
In particular, it was argued that various lags of uncertain length can pervert the timing of corrective measures and even turn them into destabilizing impulses.7 In the 1970s, when macroeconomics acquired formal microfoundations, the theory even attempted to incorporate the interplay between public and private policy models. The early rational expectations school assumed that economic actors would be able to absorb the policy models used by the authorities, thereby enabling the actors to second-guess the authorities' intentions and undertake actions that would undermine economic policy.
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From page 68... ...
Most studies ignore social values, while others treat them either as constants or as exogenous variables.l° In the economics of institutions, the notion of information scarcity usually enters into the analysis through the assumption of incomplete data, but it is the union of incomplete data and what may be called the control problem that gives the new institutionalism its distinctive flavor.ll Simply stated, costly measurement is responsible for incomplete data. Incomplete data raise the cost of verifying quality and monitoring behavior.
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From page 69... ...
A poor society that attempts to create incentives and information environments for economic growth by launching institutional change can hope for rapid success (1) if its underlying social values are consistent with the new institutions of growth, (2)
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From page 70... ...
rely on private policy models of the physical world, the social system, and the moral order. · Successful structural policy must allow for interactions between public policy models and private models, and revisions to both in response to new data.
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From page 71... ...
This meant that structural policy appeared to have zero degrees of freedom. The notion of incomplete data, incomplete models, and incomplete decisions changes this picture and expands the policy choice set.
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From page 72... ...
A world of incomplete information cannot be determinate: with variable and changing policy models, there is ample scope for new policy directions. PUBLIC POLICY AND SOCIAL TRANSFORMATIONS The new institutionalism has paid little attention to the role of policymakers and to the specification of policy instruments for institutional change.
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From page 73... ...
More knowledge can be a two-edged sword, unless conflict over structural policy involves primarily dispute over the effectiveness of different means to a common end. Complexity, Learning, and Feedback The current strength of the new institutionalism (and related fields, such as the new theory of the firm, industrial organization, and positive political economy)
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From page 74... ...
A final point about the design of control systems concerns the choice between centralization and decentralization. The direct links among measurement costs, incomplete data, and control, combined with the propensity of measurement costs to increase with distance, slant structural policy toward decentralization in structuring both economic organizations and public administration.
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From page 75... ...
that communities that share specific private policy models (and related informal institutions) resist public policy measures aimed at lowering transaction costs and increasing efficiency, and (2)
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1969 Transaction costs, risk aversion, and the choice of contractual arrangements. Journal of Law and Economics 12(1)
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In Institutional Change and the Public Sector in Transitional Economies, Salvatore Schiavo-Campo, ed. Washington, DC: The World Bank.
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From page 78... ...
1990 Institutions, Institutional Change, and Economic Performance. Cambridge, England: Cambridge University Press.
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From page 79... ...
In Empirical Studies in Institutional Change, L Alston, T
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